Bitcoin development company Blockstream is currently developing a much more robust version of bitcoin of proof reserves and is currently open-sourcing the tool in order to gain some much needed feedback, according to the company. Traditionally, a proof of reserves tends to vary from each exchange and requires movements of all funds an exchange possesses, leading to a serious security risk.
Blockstream very own Proof of Reserves tool is based on “tried-and-tested methods” that currently being used while addressing issues they present. The significant changes the tool offers to its users is that the exchanges will be able to prove how much in assets they have without needing to make any transaction, providing transparency without posing a possible threat to their assets.
“We originally set off to build a solution for Liquid functionaries to prove their Liquid bitcoin (L-BTC) reserves to third-party auditors. But as we researched the project, we quickly realized that existing approaches by exchanges for regular Bitcoin reserves had room for improvement, and that our software had wider applications outside of the Liquid Network,” their blog post reads.
The only thing an exchange needs to do is create a transaction spending for all of the exchanges bitcoin UTXO and include an extra invalid input. The invalid input renders the entire transactions invalid. Even so, it’ll still be possible to use it as proof.
While there are still some possible security issues, Blockstream is currently working for ways to rectify it. The proof will still require exchanges from showing their entire lists of UXTOs for instance. Although, the company is currently planning to provide even more privacy with the use of Liquidity. Meaning that exchanges will no longer need to give the values of every single UXTO but the sum of all values.